BSQUARE's Second Quarter Revenue Increases 16% to $9.4 Million

7/28/2003 - BSQUARE Corporation (Nasdaq: BSQR) reported financial results for the second quarter of 2003, ended June 30. Revenue was $9.4 million, up 16 percent, with a net loss of $743,000 ($0.02 per diluted share), compared to revenue of $8.1 million with a net loss of $6.6 million ($0.18 per diluted share), in the prior quarter. The net loss included a net gain of $2.8 million ($0.07 per diluted share) from restructuring activities. In the second quarter of 2002, the company reported revenue of $9.5 million and a net loss of $12.7 million ($0.35 per diluted share).

In a separate release issued, the company also announced that Bill Baxter stepped down from chairman and chief executive officer of BSQUARE effective today. Baxter will remain with BSQUARE as chief technology officer focusing on the company's Power Handheld product and will continue to serve on the company's board. Brian T. Crowley, who has served as BSQUARE’s vice president of product development, has been named to succeed Baxter as CEO and Don Bibeault, has been named as chairman of the board. A copy of the complete announcement is available at Baxter said these management changes were timed to coincide with the tail end of a lengthy period of restructuring and reorganization and are designed to position BSQUARE for steady growth and a return to profitability within the next 12 months.

“For more than two years, BSQUARE has struggled to adapt itself to the realities of the ongoing slump in technology markets,” Baxter said. “During that time, we have initiated a number of actions aimed at narrowing our business focus, reducing our overhead, and improving our operational efficiency. That effort has resulted in an organization that is just over a third as large as it was at the outset of 2002 and has narrowed its operations to focus on two core lines of business—professional engineering services, or “PES,” and distribution of third-party products—and a single new product: our Power Handheld Reference Design. During the second quarter, we saw significant revenue and margin improvement in our PES business, and the growth that has characterized our distribution business for the past several quarters is continuing in the current quarter. In addition, the development stage of our initial Power Handheld design is nearing completion, and we expect to receive our first commercial orders in the third quarter.”

“The improvement in professional engineering services was driven by several factors, including increased demand, better utilization, and improved pricing—all of which contributed to a significant improvement in service gross margin,” Baxter said. “These improvements are, in part, the result of our ongoing shift in emphasis from bidding on single contracts to building strategic relationships with large OEM and silicon vendors, which represent major opportunities for repeat business. We believe this new focus will continue to drive growth and yield further margin improvement in our services business.”

“Margins on product sales also improved during the quarter. With product revenue up four percent sequentially, product gross margin improved 37 percent from 20.1 percent in first quarter to 26.3 percent in second quarter of 2003. This resulted from increased sales of our own products, such as SDIONow!, and better pricing on Microsoft licenses, which represent the bulk of our product sales. We believe our third-party sales will continue to improve, partially due to increased demand from co-marketing campaigns. Several additional positive trends in our Microsoft licensing business include a significant increase in toolkit sales, which is a leading indicator of product sales as customers typically purchase licenses when they ship devices three to nine months after the tool kit purchase. We are also experiencing growth in the overall embedded Windows market through toolkit and licensing sales to many new customers who have previously not licensed embedded Windows operating systems,” Baxter said.

With respect to Power Handheld, Baxter said he is excited to focus more of his attention on development of the product and taking it to the market. Baxter said he believes Power Handheld will begin to contribute significant revenue in the fourth quarter of 2003.

Along with the company’s operational improvements, vice president of finance and chief financial officer Nogi Asp said management has taken a number of steps that resulted in a reduced use of cash and an improved balance sheet. At the onset of the second quarter, the company expected to use cash of $4 million to $5 million, including $1 million for liabilities related to previous restructurings, but reduced by $2.9 million from an expected refund of prior years’ income taxes. During the quarter, the company used $2.3 million for operations, $1.1 million for restructuring, including lease buy downs that will save the company $3.5 million over the next two years. The company also restricted $2.0 million of cash to secure long lead-time parts for a manufacturer of the Power Handheld. In addition, the company collected $2.8 million from the expected tax refund and received a payment of $1.5 million in connection with the settlement of outstanding litigation. At June 30, 2003, the company had a balance of $26.5 million of cash, restricted cash, cash equivalents and investments, which is an increase of approximately $1.0 million over the prior quarter.

About BSQUARE Corporation
BSQUARE accelerates the development, deployment, and management of next-generation smart devices and applications. For nearly a decade, BSQUARE has provided more than 150 world-class manufacturers, integrators, and service providers with the building blocks necessary to design, develop, and test innovative products quickly and cost effectively. The company's suite of products and services includes Device Development Solutions, Wireless Solutions, and Custom Engineering Services. BSQUARE offers its customers deep expertise in the latest hardware and software, providing critical engineering services that have resulted in the successful launch of hundreds of new products and applications. For more information, visit BSQUARE at or call (888) 820-4500.

BSQUARE is a registered trademark of BSQUARE Corporation.

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